In the first three weeks of May, 30-year fixed mortgage rates hovered near 5.25% and eased to just above 5% by month end. Paired with record-high home prices in most markets, the highest mortgage rates in over ten years (per Freddie Mac weekly data) are cooling demand for new and resale homes.
Pricing indicators are a strong proxy for demand, often revealing the earliest signs of a faltering or strengthening housing market in our independent surveys. A strong demand environment generates rising prices, while a weak environment triggers cooling prices as competition for home purchases erodes.
Fewer home builders and resale agents report price increases in May, extending the cooling trend that started in March. Typically, home builders respond more quickly to slowing demand with pricing adjustments than several hundred thousand consumers selling their individual homes through resale agents. However, the following graph shows strong parallels over the last year as well as month over month. The reports of price increases peaked in February and have ticked down at an accelerating pace through May.
We asked builders and agents for insights on how buyers were reacting to 5%+ mortgage rates in May, given how similarly the new and resale housing segments are trending. Both groups indicated that a small number of buyers had cancelled so far; however, roughly 50% in both groups have seen buyers halting their home searches and we expect these percentages to increase throughout the summer.
Evaluating May conditions is helpful for identifying the current slowdown, but we forecast mortgage rates to continue rising as the Fed works to tame inflation. So, the question is not if for-sale demand will continue to cool, but how hard the impact will be.
We routinely ask about future expectations in our survey work and consider this forward-looking optimism or pessimism when crafting our housing thesis. When we asked home builders and agents for their sales outlook for the next six months, we observed moderating expectations. In May, just 39% of home builders expected Good sales in the next six months versus 68% Good ratings in January. Similarly, 46% of resale agents expected Good sales in May vs. 81% Good in January. These ratings of expectations will likely trend lower as mortgage rates climb higher, inflationary pressures resist quick fixes, and recessionary fears intensify.
In contrast, single-family rental (SFR) operators maintain much more optimism for leasing activity over the next six months. We expect housing demand will shift to renting as households seek relative affordability and flexibility.
74% of the SFR operators surveyed in 1Q22 reported Strong to Very Strong expected leasing in the next six months. Their optimism—paired with strong current leasing ratings, record high occupancy, and rapid lease-up times—point to strength and stability in the single-family rental market, outperforming for-sale demand. The monthly cost of owning a typical 3-bedroom entry home currently exceeds the rental cost for a similar home in most markets by a wider than normal margin.
A flood of capital is waiting to acquire rental homes. While the media sounds the alarm for another 2007/2008 scale housing correction, our thesis is more positive. Plenty of single-family rental capital prepared to buy available new or resale home inventory should limit the extent of home price declines and expand the supply of highly desirable living spaces for renters. Additional single-family rental homes can deliver the space and privacy so many households crave but currently cannot afford through homeownership.
As housing market conditions evolve, we remain focused on supporting clients’ investment decisions through timely insight and forecasts. To learn more about the single-family rental and/or build-to-rent market, fill out this form or contact Nicole Stadick, and we can show you our research membership content or put you in touch with the right consultant.